Syncrude Canada Ltd. is scrapping plans for an expensive upgrader as it redraws its growth plans in a bid to profit from strong demand for unprocessed oil sands bitumen.
Rather than transform its heavy Fort McMurray-area crude into a light sweet oil, Syncrude is now making plans to export what critics have called "raw bitumen." The new strategy will allow the company, which is owned by a consortium of major energy players, to substantially trim its capital requirements while maintaining a strong rise in production.
Syncrude's move is the latest blow for those who have pushed for Alberta to process more of its crude on home soil, where it can be used to generate jobs, provincial income and tertiary industries.
But those dreams have been largely extinguished in the last year, as extraordinary changes in the U.S. refinery industry have created strong new demand for unprocessed Canadian crude. Suncor Energy Inc., Imperial Oil Ltd., Total SA and Statoil ASA have all backed away from plans to process bitumen in Alberta in favour of exporting it raw, a strategy they believe will be more profitable.
For Syncrude, the change is designed to cut the cost of building an upgrader - a hugely expensive undertaking - and reduce the risk that comes from operating one in the future.
"We've always talked about expanding. It's just how we will expand has evolved and changed," said Siren Fisekci, spokeswoman for Canadian Oil Sands Trust, Syncrude's largest owner.
Syncrude has long planned to boost its current production capacity of 350,000 barrels per day to 500,000 barrels by 2020.
Under the previous timeline, output was to jump to 400,000 a day by mid-decade with improvements to its facilities, in a process called "debottlenecking." The remainder was to come through construction of a new upgrader by 2020.
Under the new timeline, which was disclosed yesterday, Syncrude will lift production to 425,000 barrels through debottlenecking, and add a further 115,000 per day of bitumen production. Both expansions are expected by 2020.
(With additions to its mining operations, Syncrude actually plans to extract 600,000 barrels a day of bitumen by 2020, but barrels that go through its upgrading process actually shrink in size, resulting in a total output of 540,000.) Bitumen on its own is too thick to flow through a pipeline: at room temperature, it has the consistency of old molasses. But Syncrude plans to employ a new system that uses a solvent to remove what Ms. Fisekci called the "nasty" part of the bitumen. That system, which Syncrude operator Imperial Oil also intends to use at its Kearl oil sands mine, will allow the bitumen to flow without needing to be upgraded.
Syncrude has not disclosed estimated construction costs of its expansion plans, but Ms. Fisekci said striking out the upgrader should result in "substantial" savings. Observers, however, are skeptical.
"Syncrude's long-term strategy is better defined and more credible following today's announcement," Andrew Potter, an analyst with UBS Securities, wrote in a note to clients.
"However, the key questions on costs and whether or not all owners will back the project (Syncrude requires unanimous approval) will remain unanswered for some time. We do not expect investors to place significant value into (Canadian Oil Sands Trust) for these expansions until these questions are answered."
Drops in heavy oil output from Mexico and Venezuela have left U.S. refiners scrambling for product, and bidding up heavy oil's price. Heavy oil has historically traded at a 20- to 30-per-cent discount to light oil. Upgraders transform heavy into light oil and were built to profit from that difference.
But the strong heavy oil demand has narrowed that differential to as little as 10 per cent, largely erasing upgrading margins - it can be more profitable to ship unprocessed bitumen.
Some analysts believe the differential will remain slim for a decade - and enough in the industry agree that two partially built upgraders in Alberta have been put on hold.